The government’s responsibility to produce the capital and the government of India is exploring more options to produce capital, the design of recapitalisation process is critical, Former Governor, Reserve Bank of India, Dr Y.V. Reddy said at an ASSOCHAM event held in New Delhi today.

Delivering the 20th JRD Tata Memorial Lecture under the aegis of the ASSOCHAM in New Delhi, Dr Y.V. Reddy, Former Governor, Reserve Bank of India (RBI) said on recent bank recapitalisation proposal that the government has put forward. Mr Reddy said that’s the requirement for regulatory purpose. This is the matter the government has been exploring.

‘The bond has to be carefully designed whether it should have SLR status, what would be holding period or maturity status. All these things have to be carefully designed. All these things will have an impact on the bond market and the government has to be careful about the spillover effect as the amount is large’, said Mr. Reddy at the event.

On the sidelines of the event, dragging corporate defaulters to the National Company Law Tribunal (NCLT) is per not the best option to resolve NPAs issue. Mr. Reddy said, ‘I would not say that is not the best option. The question was whether as a regulator the RBI should be taking initiative in regard to operational bankers. What I said is that normally it is the board not the regulator. It is because of extraordinary circumstances this initiative is being taken.

There is considerable discussion about the independence of central bank in India. At the same time, there are many who argue that RBI is the creation of the government and accountable to government. Hence, too much of independence cannot be justified. There is a basic philosophy behind the arrangement of central bank to be the guardian of money and finance, said the former Governor RBI.

The idea is to convince people that they can have trust in money and finance irrespective of political changes since an independent institution, namely, central bank, has been entrusted with such matters. Further, the government has spending authority and, therefore, it wants to convince people that creating money is being handled by another institution.

In other words, a central bank is an institution created by the government for its own purposes. The government would like to convince people that central banking is independent but would like the central bank to do what it wants. Central bank has to convince the people that it is independent if it wants to be effective. This is the tussle that has been happening for a long time and in all countries. The balance keeps changing depending on the context. I hope to add some clarity to the on-going debate on central banking in India, added Mr. Reddy.

For most of the 1980s, there was a quantum jump in growth, thanks to early industrial and trade liberalization measures and some financial market reforms. RBI became concerned with higher fiscal deficits and large borrowing programme financed through monetization. Towards the end of the 1980s, short term external financing also increased. The collapse of the USSR added to the imbalance in external sector.

RBI negotiated the transition of rupee trade agreement with Russia. Added to political uncertainties, the Gulf crisis triggered high oil prices further tightening the balance of payments situation. NRI deposits and remittances were adversely affected. RBI repeatedly warned the government about the possible crisis because of large deficits in fiscal and external sectors. The political instability during this period of domestic vulnerabilities coupled with gulf crisis led to the balance of payments crisis in early 1991.

The RBI successfully avoided hyper inflation and also ensured that banking system retained the confidence of the people at large. Part of the credit should go to Government because the political pressures in a functioning democracy helped contain inflation. Further, public sector banking itself provided the necessary comfort to people at large. The balance of payments was on a different footing. RBI conveyed its concerns as the situation was deteriorating and warned the Government of impending payments crisis.

The RBI became the first line of defence as the stress in balance of payments became acute in 1991. However, management of a full-blown crisis required the total involvement of the government. Despite political uncertainties, the government took the advice of the RBI and strongly supported its emergency actions in both financial and external sectors, said Mr. Reddy.

It culminated in using gold belonging to the government and pledging the gold belonging to the RBI to save the country from loss of reputation and defaulting from meeting external payments. Negotiations with the International Monetary Fund were held in order to obtain the support in climate of political uncertainty. The RBI and the Government drew upon their professional skills and clout both within and outside the country to device strategies and actions. The apolitical stature of RBI won the support of the full spectrum of political leadership.

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